Time Running Out for Roth Do-Over

By Jonnelle Marte

Regretting your Roth IRA conversion? You have just a few days left to undo that move: The deadline to reverse — or to “recharacterize” in tax parlance — the conversion is Oct. 17.

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Why consider a do-over? Thanks to the volatile stock market, investors may find their Roth IRA is now worth less than on the conversion date. That means they’d be stuck paying taxes on money that’s been lost. Investors may also consider reversing the conversion if they can’t afford that tax hit; the Internal Revenue Service requires that investors pay taxes on their savings when they convert to a Roth IRA from a traditional one, though they don’t have to pay them all at once.

More people may be considering a do-over this year because the number of people who could convert to a Roth IRA soared in 2010 thanks to new rules from the IRS that made more people eligible. Before 2010, people with adjusted gross income of more than $100,000 typically couldn’t convert a traditional IRA to a Roth IRA. High-income taxpayers still cannot contribute to a Roth, but they can do the conversions.

To undo the conversion, you must fill out a form with your Roth IRA custodian — and keep good records. You may have to amend your 2010 return, using Form 1040X, if you’ve already filed.

Even a do-over isn’t permanent: You can still reconvert those funds to a Roth IRA if you change your mind again later, but you have to wait at least 30 days after the reversal.